What Is Money?

Gary North
Lew Rockwell.com
Tuesday, Sept 29th, 2009

This question divides economists even more than it divides voters. Voters do not think much about this question. Economists think about it throughout their careers. They do not agree with each other regarding the answer.

The problem is, about half of American economists who specialize in monetary theory and banking policy are either on the payroll of the Federal Reserve System or sell their services to the FED on a piece-rate basis.

Most of the others are trying to get in on the deal. Through the FED, economists set policy for American banking, and, through banking, just about everything else.

The economists are not agreed. Federal Reserve policy is therefore not consistent. It is mostly a system of trial and error – these days, very large errors. Through the influence of the FED among foreign central banks, and through the influence of the top dozen American graduate schools, the confusion over what money is has spread to the entire world.

In the area of monetary policy more than any other area of modern life, the self-certified, self-policed, and self-confident experts are making it up as they go along. Then the rest of us have to go along.

In my forthcoming series of articles, you will learn the following:

  1. The experts do not know horse apples from apple butter about monetary theory.
  2. Monetary theory should be an integrated part of a general economic theory of how the world works.
  3. Whenever an economic theory of how the world works makes an exception for monetary theory, the proposed monetary theory is incorrect, or the general theory is incorrect, or both are incorrect.
  4. Fiat money is always a form of counterfeiting.
  5. Counterfeiting produces bad results for almost everyone except the counterfeiters.
  6. Fractional reserve banking is legalized counterfeiting.
  7. Government fiat money is counterfeit.
  8. Those who trust government money will lose wealth more surely than those who do not trust it.
  9. There are ways to escape bad monetary policy.
  10. The worse the policy, the fewer the avenues of escape.

If you stick with me through this series of articles on monetary theory and policy, you will have a much better idea about where modern society has gone wrong. You will also have a better idea of how to protect yourself against the inevitable consequences, all of which are negative, of the government’s violations of sound money principles.

It boils down to this question: If you don’t know what money is, how will you obtain more of it? This is another way of saying that if you don’t understand the modern violations of monetary theory, you will not understand the extent to which you are vulnerable to bad policies which are going to produce disastrous consequences, just as they have in the past.


What is money? These three words introduce one of the most baffling areas of economic thought. I can think of no other area of economics in which there is greater confusion, leading to greater economic disruptions, than this one.

A characteristic feature of all systems of economic thought except the Austrian School is a failure to integrate monetary theory with general economic theory. With the exception of the Austrian School, all schools of thought create exceptions to the laws of economics that they say apply in all of the other areas of the economy. They insist that the government is necessary to intervene into the free market in order to bring order to monetary affairs.

They argue that money is not part of a system of economic practice and theory. They also imply that monetary theory is not part of an integrated system of economic cause-and-effect. The explanations given for economic causation in every other area of the economy are not accepted as valid in the realm of money.

Monetary theory, when coupled with an explanation of how banking works, provides a case study of the unwillingness of economists to pursue the logic of economic causation. This should be a tip-off to the fact that there is something fundamentally wrong with either their theory of money or their general economic theory.


The confusion regarding monetary theory and practice has several aspects. First, there is conceptual confusion. There is a lack of understanding of how the free market works. The two fundamental rules governing free-market pricing are these:

  1. Supply and demand
  2. High bid wins

When you apply these two principles to any area of the economy, you have the conceptual tools necessary to understand the basics of economic causation. All deviations from free-market economic theory invariably involve the abandonment of one or both of these two principles of economic analysis. This certainly applies in the area of monetary theory and monetary policy.

Second, there is the confusion over the origin of money. How did money come into existence? What motivated people to make the decisions that led to the institution of money? What interference with people’s motivation did the state imposes in order to gain certain advantages for itself? How do these interventions reduce economic liberty and the smooth functioning of the monetary system?

Third, there is the financial issue. That which individuals want for themselves personally, namely, more money, is bad for the economy when either the state or the banking system interferes with private contracts. What we want to achieve for ourselves individually we had better avoid corporately: more money. This is not understood by virtually all schools of economic opinion, with the exception of the Austrian School.

Fourth, there is the political issue. There is great confusion over the proper relationship between civil government and monetary policy. Economists insist that the monetary system should not be autonomous; civil government must interfere in some way to provide stability and predictability to the monetary order. In rare instances, this is limited simply to the enforcement of contracts. In most cases, the principle of necessary government regulation is extended to mandate broad intervention by political authorities.


There is a familiar phrase in the American conservative movement: ideas have consequences. This phrase comes from the book title of a 1948 book by English professor Richard Weaver. This principle certainly applies to monetary theory. Mistaken ideas have disastrous consequences.

Mistaken ideas in the area of monetary policy have produced more disasters than mistaken ideas in any other area of economic thought. There is a reason for this. Money is at the heart of the modern economy. Mistaken policies in the realm of money and banking spread to the entire economy. There is a kind of multiplication effect. The worse the idea in economic theory, the more widespread and devastating its consequences when the idea is applied to the monetary system.

There are five analytical categories in which mistaken ideas lead to bad economic policy. I summarize them as follows: sovereignty, authority, law, sanctions, and continuity. These five categories are crucial for economic analysis. They are exceptionally crucial in the realm of monetary policy, as I will demonstrate. They are violated constantly in modern society. They have been violated constantly ever since 1914: the outbreak of World War I. National governments and private banking came close to honoring the truth in these five categories for a century: 1815 to 1914. During that century, there was considerable monetary stability for Western Europe, leading to greater economic growth than any other period in the history of man.

Because of the violation of nineteenth-century monetary policy, we have seen the rise of world wars, hyperinflation, and depression. None of these would have been likely apart from fiat money, which is a violation of the law of property. This violation leads to terrible consequences in the real world.


Let us return to the original question: What is money? The best answer to this continual question was provided in 1912 by the Austrian economist, Ludwig von Mises. In his book, “The Theory of Money and Credit,” he provided an answer in six words: money is the most marketable commodity. He had in mind gold and silver coins, but his theory encompassed any commodity that can or has served as money in history.

By defining money as the most marketable commodity, Mises integrated monetary theory with general economic theory. His theory of money was an extension of his theory of the free market. He rested his case for the free market on the right of private ownership.

I have said that there are five analytical categories in which mistaken ideas lead to bad economic policy: sovereignty, authority, law, sanctions, and continuity. Now I must explain what I mean.

1. SOVEREIGNTY. Property rights are the foundation of money, Mises argued. Property rights provide the legal setting for voluntary exchange. He argued that the development of money was an unplanned outcome of the decisions of individuals who sought to increase their wealth by increasing their productivity.

Individuals have always sought to specialize in those areas of production in which they have a competitive advantage. This advantage may be due to personal skills. It may be due to geographical location. Whatever the origin of the advantage, the individual seeks to exploit this advantage. He specializes in one area of economic production, so that he will have an increased quantity of goods and services to exchange with other individuals, who specialize in those areas in which they have a competitive advantage. Mises argued that out of the barter system came money. A monetary commodity was originally valued for something other than exchange. It may have been sought because it was beautiful. It may have been sought because it had religious significance. Whatever the reasons that people sought to accumulate a particular commodity, this led to the discovery that this particular commodity could be used to facilitate voluntary exchange.

Instead of having to find a buyer for the particular commodity or service that an individual produced, he could exchange his output for a commodity that was widely desired by other members of society. As these exchanges grew in number, this commodity began to attain value as a result of its ability to serve in the process of exchange. What had originally been a commodity valued for some other characteristic increasingly was valued for the purpose of facilitating exchange. In other words, this commodity became money.

As a free-market economist, Mises did not attribute the origin of money to the decision of a civil government. It was not that a particular king or group of nobles decided that it would be convenient if a particular commodity were adopted as money. On the contrary, governments began to extend their control over money because they recognized that they could increase their extraction of wealth from private citizens with greater efficiency if they taxed people’s monetary income rather than taxing their individual output. It was easier to collect money and spend it for the purposes of civil government than it was to collect hundreds or even thousands of goods. It was not that the state was the origin of money; it was that money became a tool of the expansion of the state. The state claimed sovereignty over money because it was convenient for the state to gain control over this most central of economic assets.

In short, Mises argued that the free-market social order possesses original sovereignty over money. Any claim by the civil government that it exercises sovereignty over money is not grounded in economic theory or the law of contracts. It is grounded in the desire of civil rulers to extract greater wealth from those under their authority.

2. AUTHORITY. Mises argued that the authority over money originally came from the authority of individuals to exchange their goods and services voluntarily. There is a hierarchy of control that is based on individual ownership.

Civil government attempts to gain authority over monetary affairs because it is less expensive for the government to expand its authority over every other area of life when it controls the monetary system. In short, there are both competing sovereignty and competing authority – market vs. state – in the competitive arena of monetary policy.

3. LAW. There is a law of monetary affairs, but this law is not unique to money. The general law of contracts led to the creation of money. A legal order that enabled individuals to exercise control over their labor, their property, and the output of the combination of labor and property led to the establishment of a monetary system.

The law of pricing is no different from the law of any other asset. Again, there are two laws: first, supply and demand; second, high bid wins. As these two laws extend to the general society, the monetary order comes into existence.

Here is Mises’ central point: the monetary system is the product of human action, but not human design. This is what is denied by all schools of economic opinion except the Austrian School. All the schools of opinion believe that, for the proper functioning of money, the civil government, because of its inherent sovereignty, must exercise control over money. So, it must have legal authority over money. This means that the law of money, as an extension of the law civil government, is different from the laws governing voluntary economic exchange.

4. SANCTIONS. Then there are sanctions. Government imposes sanctions for violating civil law. What are the comparable sanctions in the realm of monetary policy? The sanctions are simple: profit and loss. These two sanctions govern the realm of voluntary economic exchange. They therefore govern the realm of monetary policy. The sanctions of profit and loss, which apply to every other area of voluntary exchange, also apply in the realm of monetary policy, and therefore should apply in the realm of monetary theory. But, we find that this is not the case in any school of economic opinion except the Austrian School.

5. CONTINUITY. The fifth category of economic analysis that applies to money is the category of continuity. Continuity is the crucial factor in all ownership. Does an individual have the right to retain possession of his property through time? Do voluntary exchanges transfer ownership of property to other individuals? If the answer is yes, then the same degree of continuity must prevail in the realm of monetary policy. One of the central factors in all forms of money is continuity through time. If an individual does not believe that a particular asset will enable him to purchase scarce goods and services in the future, the value of the monetary unit will fall. It will fall to whatever value that consumers impute to it for their purposes. If gold or silver coins were expected to be abandoned by market participants who are seeking stability of purchasing power over time, the value of the two metals would fall to whatever they are worth in other areas of the economy.

It is more likely that pieces of paper with rulers’ pictures on them will be subjected to doubts concerning their continuity of value than gold or silver coins that are used widely in exchange.

In summary, the original sovereignty over money was established by the free market, which is in turn was an extension of a particular legal order. Second, authority over money inheres in an individual’s right to possess property. Third, the law of money is an extension of the law of private property. It is in no way different from the general legal order that governs ownership and exchange. Fourth, the sanctions of profit and loss apply to money, just as they apply to all the other areas of the free market economy. Finally, there is continuity of money over time because there is continuity of ownership over time.


Money is an extension of the free-market social order. To the extent that civil government interferes with money, it interferes with the operations of the free-market order. Interference in the area of money beyond the general application of laws governing contracts has more extensive consequences, all negative, than interference in any other area of the economy. This is because money is the universal facilitator of voluntary exchange. An error in policy in the realm of money extends to the entire society.

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slave masters and the slaves


Co-operation vs. competition / Competition is enslaving us all / Economics, slavery and the financial crisis

The human spirit will thrive with co-operation: far more than with competition.  So why is our society based upon competition and not co-operation?  The current economic system is based upon the masses competing with each-other for limited resources.  For one reason, to keep them enslaved to the  system.  … The current economic crisis is being caused by the end of a pyramid scheme by the Federal Reserve Bank called the Fractional Reserve Banking System.  Read article here


What Is Money? Part 7: Gresham’s Law

Gary North
Lew Rockwell.com
Saturday, Oct 17th, 2009

“Bad money drives out good money.” This aphorism has been known as Gresham’s Law for almost 500 years. Sir Thomas Gresham never said it exactly like this. The statement is wrong in its familiar form.

Bad money does not drive out good money in a free market. The free market rewards producers of customer-satisfying products and services. Good money drives out bad money on a free market. The definition of bad money is money that the free market refuses to use. Gresham’s law, as stated, is incorrect. The opposite is true.

A correct version of Gresham’s Law is this:

“In an economy with a government-legislated fixed price between two currency units, the artificially overvalued currency drives out of circulation the artificially undervalued currency.”

This does not have quite the same ring to it as the more familiar version.


Gresham’s Law is simply an application of the economic analysis of price controls to monetary units. There is nothing complicated about it.

From the early days of the republic, the United States government legislated a price control between gold and silver. At the time the law was first passed, gold was worth 15 times as much as silver was. The ratio of 15 to 1 became law.

In 1848, there was a huge gold discovery in California. For discussion’s sake, let us say that the price of gold in silver on the free market subsequently fell to 10 to 1. But the government’s law still holds. Banks are required to pay 15 ounces of silver to anyone who brings in an ounce of gold and asks for silver.

Let us say that you were there. You get a bright idea. You go to the bank with two ounces of gold. You demand 30 ounces of silver. Then you take your 30 ounces of silver and buy three ounces of gold. Where? Across the border in Canada or Mexico. (OK, it was a long ride on horseback. Maybe there were banking trading ships just off San Francisco.) You then take your three ounces of gold to the bank and demand 45 ounces of silver. You repeat the procedure until the bank has no more silver to sell at the price of 15 to one.

Of course, you would do this with ten times as much gold. Your competitors, currency speculators, would buy a thousand times as much gold. We call this “economies of scale.” Sorry, Charlie.


What Is Money? Part 7: Greshams Law 071009banner3

The artificially overvalued currency (gold) remains in circulation. “One ounce of gold is worth 15 ounces of silver. The government says so.” The artificially undervalued currency (silver) disappears. “One ounce of gold is worth 10 ounces of silver. The free market says so.” So, people start buying 15 ounces of silver with an ounce of gold in the government-rigged market in order to buy an ounce and a half of gold with silver in the free market.

Meanwhile, anyone in the know who receives a silver coin in exchange sets aside the coin. Silver coins go out of circulation. Mexico and Canada wind up with America’s silver coins. The U.S.A. winds up with gold coins.

Trade between Canada and the U.S.A. then falls. So does trade with Mexico. The foreigners don’t want to accept gold from Americans at the fixed rate of 15 to one, since it is worth only 10 to one. Signs go up: “For sale to Americans: for silver only.” But Americans cannot get their hands on much silver; it has already been transferred to Canada and Mexico, or it is in coin hoards in Americans’ homes. So, Americans cannot buy goods from Canada and Mexico.

Throughout American history, right up until gold was declared illegal in 1933, either gold coins or silver coins were driven out of circulation at any government-mandated price. The 15-to-one price was used for decades. This system was called bimetallism. It did not work. It was monometallism operationally.

This is another case of the economics of price controls. The process is not limited to money. If the government says it is illegal to sell gasoline above $4.00 a gallon in order to avoid a fine for price gouging in a time of crisis, and the free market price is $5.00 a gallon, expect to spend lots of time in gas lines.

This happened in Nashville and Atlanta in September of 2008. People could not buy gasoline. The pumps were dry. When a gasoline truck drove into town, it was soon followed by a line of cars, rather like a mother duck and her ducklings. Drivers did not know where the truck was heading. They followed it, so they could line up as soon as it unloaded its cargo.


Let us assume that Congress passes a new law. The exchange rate between gold and silver is no longer fixed by the government. People can buy and sell gold for whatever price they can get.

Nobody is sure what the gold/silver ratio will be after the law is passed. But speculators expect gold’s price to fall toward ten ounces of silver – the free market’s price.

As soon as speculators think that this new law will pass, they start selling gold – “Get rid of it; it’s overvalued” – and start buying silver. They know that gold will not be artificially overvalued much longer. Better to start buying silver in Canada and Mexico and hold it across the border until the law passes. It will not take long for the new ratio to be established. At that time, gold and silver coins will circulate side by side in the United States. The government does not set a price. There is neither overvaluation by law – fiat valuation – nor undervaluation. Supply and demand jointly establish the exchange rate, moment by moment. No problem. No glut of gold coins. No shortage of silver coins.

If both gold and silver coins are called dollars, these dollars will buy varying quantities of goods and services, moment to moment. A gold dollar is not worth what a silver dollar is.

Back in the 1960s and 1970s, there was a debate between those who advocated fixed exchange rates for the currency market – the Bretton Woods system – and those who advocated floating exchange rates. Milton Friedman was the best-known advocate of floating rates, meaning market-established rates. Friedman always had the advantage conceptually. He stood for free-market pricing. The fixed-rate people were in favor of price controls. They never used that language, however. Had they been forthright in this regard, they would have lost the debate much earlier in free-market circles.

The debate ended after December 1973. That was a year and a half after Nixon took the country off the international gold-exchange standard, i.e., the Bretton Woods agreement. From late 1973 on, the dollar has floated. Defenders of the old fixed-rate system are few and far between.

The fixed-rate system was a Keynesian-like imitation of the international gold standard. It began in 1922. Prior to World War I, when a nation’s currency was defined as a specific quantity and fineness of gold, and when the central bank or treasury redeemed gold on demand, there were fixed exchange rates between gold-backed currencies. The free market adjusted the rates. Because the exchange was in fact gold for gold, ounce for ounce, the currency exchange rates remained fixed. These rates were definitional. They were rates of exchange between quantities of gold.

It is 1875. A British citizen walks into an American store in New York City. He sees something for sale for an ounce of gold. He hands the store owner four British gold sovereigns. He walks out with the item. Some critic might exclaim: “But the sovereigns have a dead king’s face on it. This face is not like the goddess of liberty, whose face is on a $20 gold piece.” “His money’s good in this store,” declares the owner.

The money was good because it was gold. The pictures on the coins were irrelevant to the store owner. He did not honor any British king. He also did not worship a goddess. He just wanted the gold. Dollars. Pounds. Who cares? He wanted the gold.

The modern gold-exchange standard (1922-1971) was a statist imitation of the gold coin standard. The rates of currency exchange were set by governments and their agencies. The currencies were no longer redeemable in gold after World War I broke out in 1914. The Bretton Woods system of 1944 extended this system. The results were predictable: foreign currency shortages, then announced devaluations by governments, which in turn forced operational revaluations of the other currencies in relation to the devalued currency.

Price controls do not produce markets that balance supply and demand. Price controls are a government’s assault on free-market pricing. They create gluts (overvalued item) and shortages (undervalued item). This does not change merely because the items are called national currency units.

The problem with floating exchange rates is not floating exchange rates. It is the lack of any fixed exchange rate between a nation’s currency and gold.

The modern floating exchange rate system is comparable to floating exchanges between the currency units of two rival gangs of counterfeiters. By “comparable” I mean “identical.” There are still a few defenders of fixed exchange rates who decry floating exchanges between currencies because the system leads to monetary inflation. The problem is not the floating exchange rate system. The problem is the counterfeiting.

Milton Friedman was not wrong for his defense of floating exchange rates and a system of free market currency speculation. He was wrong because he was a defender of government counterfeiting. He attacked the gold coin standard. So do his followers. He thought that a hypothetical system of automatic, fixed-rate monetary expansion was preferable to a gold standard. But there is only one way to get the central bank counterfeiters to pick a monetary expansion figure and stick to it. That way is called the full gold coin standard.


There were two gold standards: the gold coin standard and the gold exchange standard. To understand the two gold standard systems, think of paper money, gold coins, and a gun. The government holds the gun.

In a gold coin standard, a bank issues paper money: banknotes. A banknote is a legal IOU. Each piece of paper promises to deliver an ounce of gold upon presentation of the paper. Think of the paper as pre-1933. The paper says $20. It promises one ounce of gold.

The government holds the gun. It is pointed at the banker. “Fail to deliver an ounce of gold for each $20 warehouse receipt, and you go to jail.”

This analysis also applies to checking deposits. But it easier to imagine when we talk about bank notes. They are IOUs.

In a free banking system, the government does not check to see if a bank has enough gold to meet all demands. In a 100% reserve system, it would. In a free banking system, rival banks and a bank’s depositors serve as the executioners. Ludwig von Mises favored free banking. Murray Rothbard favored 100% reserves.

Step two: the issuing bank is the central bank. Does the government hold a gun on the central bankers? In theory, yes. In practice, it depends on how dependant the government is on loans from the central bank.

After World War I broke out, every European government except the Swiss holstered its gun. The commercial banks were allowed not to redeem gold on demand.

Then, within weeks, there was a new rule. The central banks demanded the gold held by commercial banks. Each government unholstered its gun. “Fork over the gold,” they said.

In the gold exchange standard, central banks and governments held British and American debt certificates instead of gold. The British and the American governments promised to redeem their debts in gold on demand. The British went back on the gold standard in 1925, but at the pre-War rate of exchange. It had to shrink the money supply. This reversed the boom. Then they inflated. Gold began flowing out to the United States. The head of the Bank of England persuaded the head of the New York Federal Reserve Bank, Benjamin Strong, to inflate the dollar, in order to take pressure off the Bank of England’s gold outflow. The NY FED did as Strong asked. This inflation was the origin of the U.S. stock market bubble. The FED reversed course in 1929, the year after Strong’s death. That caused the crash.

In 1931, Great Britain went off the domestic gold coin standard. It continued to redeem gold for other central banks. The U.S.A. followed this lead in 1933.

Busby Berkeley unknowingly launched a fond farewell to the gold coin standard in “Gold Diggers of 1933.” That was the first and last time any movie chorus line was decked out in Liberty head $20 gold pieces. Ginger Rogers sang “We’re in the money!” (http://tinyurl.com/ylekr7e) That same year, Roosevelt pointed the gun at every American and every resident in the United States. “Turn in your gold.” The next year, the government hiked the dollar-gold exchange rate of gold to $35 per ounce. It let the Federal Reserve System issue currency against this gold.

In 1971, Nixon took the nation off the gold-exchange standard. Not a shot was fired.

Conclusion: civil government points its gun at private citizens. It does not point it at itself. Cleavon Little’s scene as the sheriff in “Blazing Saddles,” where he points his gun at his own head, threatening violence, was good for laughs. It was not good political theory.

What Is Money? Part 7: Greshams Law garyCONCLUSION

Gresham’s Law, properly understood, is a real phenomenon. When a government threatens violence against currency traders for daring to make an exchange at a rate not mandated by the government, there will be a glut of the overpriced currency and a shortage of the underpriced currency in that jurisdiction. The result will be decreased trade across borders. There will be shortages of goods on both sides of the border. Most people’s wealth will decline as a direct result of reduced trade.

Gresham’s Law for centuries was observed in action, but it was not analyzed in terms of the economics of price controls. This was true in the pre-Nixon era. The discussion of fixed exchange rates by those favoring fixed rates was never discussed in terms of the controls’ legal status as price controls, any more than a tariff is ever discussed by its proponents as a sales tax on imported goods and, necessarily, as an export restriction. The problem with people’s incomplete understanding of Gresham’s law is that they treat money as arising from government rather than from the free market. They imagine that there is a failure of the free market: “Bad money drives out good money.” There is no failure of the free market. There is a failure of a government-imposed price control. People see government as sovereign over money. It is not. Here is why bad money drives out good money: a bad law forces people into capital-defense mode.

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